CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY

Employment creation and the boosting of income opportunity are some of Nigeria’s top challenges today. Democratic governance has placed them at the top of its policy priorities. Government policies and strategies are now being geared to encourage and support the private sector in generating growth in self-employment.

Although government has been the major employer in Nigeria’s formal sector, the development of the economy and the growth of employment opportunities actually depend on the investment decision of the private sector made up mainly of major corporate investors and medium — scale businesses, but this also includes small —scale entrepreneurs, artisans and innovators. The need for effective or sound corporate governance and financial reporting among small and medium term enterprises in Nigeria cannot be over emphasized. There is a link between financial reporting and corporate governance.

Corporate governance broadly can be defined as the set of processes, policies, laws and institutions affecting the way a company is directed. It also includes relationship among the stakeholders of the company and a definition of the goals for which it is governed (OECD, 2004; Cadbury Committee, 1992; Economic issues, (2002). In the early days, most attention focused on rules and policies to share power between principals and agents and govern management activities.

Within the past few years, it has become evident that financial reporting is a core element of corporate governance. Without transparent, relevant, reliable information, a company’s stakeholders are not able to assess management performance, and to make the investment decisions they need o make. The sudden demise of large, well-established companies such as significant financial reporting restatements at Shell, Xerox, Ahold and many others have shaken not only confidence in financial reporting, but into the financial system as a whole. As a consequence, stock markets have been occurring for several years, and pension systems worldwide have been under pressure. Financial reporting today is perceived, no longer as a low — priority bookkeeping exercise, but a central function for directing a company under good corporate governance principles.

1.2 STATEMENT OF THE PROBLEM

In Nigeria, most businesses in the formal sector are not publicly listed. In a survey of enterprises in six randomly selected states found that only 13.3% of the enterprises are listed in the Nigerian Stock Exchange (NSE), while 48.5% are limited liability companies. Thus close to 38% of companies operating in the formal sector operate outside the provisions of the company law and nearly 87% of formal sector businesses may be operating outside the legislation governing the capital market.

In 2010, there were 599 (6.05%) public limited companies in Lagos state while private limited companies were 2.688 (27.15%) sole proprietorships form of businesses in the formal sector in the state as they constitute nearly 59% of registered enterprise.

Partnerships constituted about 7% of the enterprises.

Thus, most enterprise in Nigeria operate outside the  provisions of the company law and capital market legislation. From this research, it then mean that, there is no effective and sound practice of financial reporting and corporate governance in the economy or among the small and medium, term enterprises (SMES) in Nigeria. There must be effective corporate governance and financial reporting practices to ensure the survival of the macro economy. Even strong economics, lacking transparent control, responsible corporate boards, shareholders rights and adequate, reliable financial information can collapse quite quickly as investor’s confidence collapse. Emphases should be made on/for mutual cooperation between the public and the private sector in developing the capacity to ensure effective corporate governance and sound financial reporting with a view to ensuring the development of market — based economies and democratic societies based on the rule of law.

In summary, there is no effective practice of corporate governance and financial reporting among the SME’s in Nigeria.

Keeping in mind accounting scandals in recent years one can come to the conclusion that the accounting information presented by financial statements did not match the needs of the shareholder and other users of accounting information because of what is described as the expectation gap. The expectation gap describes the difference between the information quality and usefulness o financial statements expected by shareholder and stakeholders and the information the accountants (and auditors) feel responsible for. As Walker stated: “in its simplest form, the expectation gap. Argument reflects the fact that accounting reports do not always reflect present market values — although many think they do”. (Walker, 1991, p. 60). And so as a matter of fact there is a lag of understanding within the public about the limitations of financial statements and the audit function.

1.3 PURPOSE OF THE STUDY

The purpose of this study is to examine the link between financial reporting and corporate governance among small and medium enterprises (SME’s) in Nigeria. Based on empirical examples of the recent confidence crisis in financial reporting and within an information economics framework, the fundamental case is being established. Then, the core elements of financial reporting are being presented. Based on an analysis of various international accounting standards frameworks, the demand for financial reporting has to meet from corporate governance perspectives are identified.

1.4 SIGNIFICANCE OF THE STUDY

This research work will be of significance because it addresses the issue of ineffective practice of financial reporting and corporate governance among small scale enterprises in Nigeria and non-compliance of company law on financial reporting/statement by some enterprises in the country, it emphasizes so strongly on the importance of corporate governance and financial reporting among SME’s in Nigeria.

Also it will examine the link between financial reporting and corporate governance. This will help to build back confidence in the minds of the investors and other users of financial statement that will boost the economy of Nigeria.

1.5 SCOPE AND LIMITATION OF THE STUDY

This study cut across the small and medium scale enterprises (SME’s) and other business enterprises in Nigeria. Research work always takes pain and also demands time, money and other limited factors. Two major limiting factors are identified below:

FINANCE

The cost of transportation during this period is too much for this research work. All my government has been within the Port Harcourt. Apart from inability to secure sufficient fund for transportation other research tools were not easily available.

TIME

Another factor that limits the scope of my project is time; much time was not available to consult various textbooks, journals, magazines etc.

1.6 RESEARCH QUESTION

The major research questions to be answered by this study are:

1. Will corporate governance and financial reporting have any impact on small and medium scale enterprises in Nigeria?
2. Is there any link between corporate governance and financial reporting?
3. Are there measures taken by the government of Nigeria to ensure the adoption and effective practice of financial reporting and corporate governance among SME’s in Nigeria?

1.7 HYPOTHESIS FORMULATION

H0:  Corporate governance and financial reporting has not been effective among SME’s in Nigeria.

HA: Corporate governance and financial reporting has been  effective among SME’s in Nigeria.

1.8 DEFINITION OF TERMS

For the purpose of this study, the following terms would be defined:

CORPORATE GOVERNANCE

Corporate governance broadly can be defined as the set of processes, policies, laws and institutions affecting the way a company is directed. Corporate governance, as a concept, can be viewed from at least two perspectives: a narrow one in which it is viewed merely as being concerned with the structures within which a corporate entity or enterprise receives its basic orientation ad direction (Bavly, D. A 1999); and a broad perspective in which it is regarded as being the heart of both a market economy and a democratic society (Sullivan, 2000).

FINANCIAL REPORTING

A broad-based statement about financial affairs of a company and other issues (Adebago Olagunju, 2008). It covers statement of financial position (Balance sheet), statement of results of operations (income statement); statement of change in financial position (cash flow statements); value added statement; accompanying disclosure notes (footnotes) and any other periodic disclosures as may be required by law to parties interested in periodic publications of financial statement.

SMALL AND MEDIUM SCALE ENTERPRISES

Many authors define small scale enterprises in many ways. We shall look at some of the definition of small scale enterprises for the purpose of this research work.

Oduoza (1991) defined small scale business as one whose capital does not exceed N5,000,000 including land and working capital or whose turnover is not more than N25,000,000 annually.

Osaze (1986) defined small business as one which is owned, managed and controlled by one or two persons, has a relatively small share of the market and employs less than 50 people.

Federal ministry of industry guideline to Nigeria bank for commerce and industry defined small scale business as those with total cost not exceeding N500,000, excluding cost of land but including working capital.